Julian Keith delves into the current challenges of student accommodation and its synergies with other tenures
Last year, the evolution of student accommodation into a new asset class was considered (“From grime to prime”, EG, 23 May, p80). This article looks at the challenges and whether this type of housing can be seen as a stepping stone to other forms of home occupation. In addition, the cross-overs with build-to-rent accommodation are reviewed.
The total number of students enrolled in 2014/15 was 2,266,075, which was a decrease of 1.4% from the previous year. Of this figure, 436,585 were international, which makes up 19% of the total UK student population. UCAS reported that 593,720 people applied to UK higher education courses in 2016, an increase of 0.2% compared with the same point last year. As with the wider housing market, the demographic demonstrates that demand for this type of accommodation remains steady, as the major agencies are reporting. However, affordability is also important.
In terms of deals, last year saw a huge amount of movement in the sector, with Savills reporting that more than 74,000 beds were traded at a total value of £5.9bn. Construction continues, albeit with the usual challenges of land value, construction costs and affordability concerns, which is where the similarities with build-to-rent stock begin.
What students want
As the previous article discussed, students using purpose-build student accommodation (PBSA) are becoming more accustomed to convenience, high specifications (albeit perhaps not in space) and additional services and amenities available to them. An advanced model of this can be seen with The Collective’s co-living scheme at Old Oak. This provides a lot of amenity space, work/life spaces and common areas which the traditional model of housing for sale or rent would not usually support. The point is, the “players” need to be sensitive to these changes in attitudes and look to opportunities and possibilities in the market.
Regulation
This is easy to say, but the regulation of student accommodation as opposed to, say, that of social housing, has been fairly sparse. This has left local authorities to manage the development of student accommodation through local plans and planning policy without the direct influence from central government via, for example, a use class. There is an argument as to whether more centralised thought into tenure mixing and placement of PBSA could be done, not least with a view to the students staying in the area and creating more balanced “mixed” communities.
Discussion of rent control has been dismissed, drawing similarities with the build-to-rent market. However, local authorities are now more attuned to the challenges faced in integrating student accommodation with the wider area, but the approach is still seen as inconsistent.
With the new stamp duty land tax (SDLT) rules that apply to the onward sale of traditional “buy-to-let” street properties being used as student accommodation (essentially, an additional 3%), this means this supply could dry up, so PBSA becomes more important. Equally, there is an opportunity for the emerging build-to-rent sector to capitalise on this, although it is worth mentioning that the SDLT levy may apply on any onward sale of these, so the secondary market may cool somewhat.
Student accommodation has managed to secure exemption from recent changes in the law, such as the compulsory checks on immigration status for tenants in the Immigration Act 2014.
The cost
On the subject of affordability, The Guardian reported in March this year that rising rents for premium-style products meant some students were priced out of the market and premium developments were pushing surrounding house prices up. This is likely to begin to mirror the wider housing market, where a range of price points is required.
Students, like the workers they become, have differing means and a successful industry is likely to cater for all of these. Tuition fees are a potential influence in this, although they have not had a huge effect on student numbers so far.
However, we are starting to see the economic effect of large numbers of students leaving, many thousands of pounds in debt. Very few can afford to get on to the housing ladder and many are simply struggling to rent accommodation.
There may be an opportunity in weaving the tenure types together to create some mobility between them by using synergies in the way in which properties are built and managed. An example of this elsewhere is housing associations, which often share services such as large-scale management contracts, or pool resources under “cost-sharing” vehicles.
Interplay with other tenures
The interplay between developers, investors and operators in PBSA and other tenures should be considered. In terms of build to rent, despite the difference in the market, there is some cross-over in the demographic and, at both the “standard” and “luxury” ends, similarity in the product. A focus on quality and amenities, rather than size/outside space – as family accommodation would aim to provide – means there must be synergies in construction techniques and, more so, facilities management that could lead to savings or opportunities to “partner up” or simply diversify.
There are examples of entities diversifying, which originally invested in student accommodation but have made a move into the build-to rent-market. Equally, there has been a lot of traction recently for US investors with a great deal of experience in the “multi-family” accommodation market in the US entering the UK’s build-to-rent and student accommodation markets.
This may be due to their ability to think at scale and apply successful practices on management to these sectors. The valuation method for PBSA appears more established than that for build to rent.
Indeed, on asset management, there may be little to differentiate PBSA from build to rent. Owners/operators need to keep a keen eye on maintenance costs and lifecycle items, but also the maintenance of the quality of the additional amenities everyone agrees that young renters/students demand. Distinctions do exist – for example, there is more anti-social behaviour, commercial activity and vacation rentals to deal with in managing student accommodation.
Nevertheless, the cross-over could mean economies for investors, operators and developers alike – by using the same contractors, operating models and legal and tax structures. The amenities can be commoditised, using a “menu” provided to students and renters allowing them to dip in and out of the benefits, and this may assist affordability.
Certain types of student accommodation could be let and managed as affordable housing. In fact, there is a track record of housing associations providing student housing. There has also been historic discussion of including student housing in section 106-style provisions.
Again, there is nothing to prevent providers offering student housing as some form of discounted rented product. Of course, financial viability would be the main issue here, but this will depend on location, among other things. There may be more interest if the provider can source a nominations arrangement with a university which could be provided with other tenures.
Affordability
Students are unlikely to have the means to buy properties (apart from via family support), but there may be a market for smaller pocket-living style discounted units, particularly for foreign students or those intending to stay on after graduation. Equally, they are, in any event, likely to be first-time buyers who will have government schemes, such as help to buy and starter homes, available to them after graduation. There may be a way to encourage more home-ownership among graduates with further schemes or initiatives.
Arguably, the biggest opportunity for those who are a part of student accommodation is taking the students and their investment and seeing whether they can offer other tenures of housing, whether it be affordable, build to rent or private for sale (by starter homes/help to buy) which the student, on becoming a graduate and employed, will take on and move into. The “home for life” idea is not a new one but, with the quality and breadth of the market, is worth considering as the next step.
The considerations of student accommodation
Difficulties
- Operators and investors generally prefer to compartmentalise assets.
- PBSA cycles are unlikely to match those in the private housing market, or even build to rent, which means the commercial sensitivities are not the same.
- Regulation is different – taxation, planning and otherwise (for example, houses in multiple occupations/the Immigration Act 2014).
- Brexit – 29,300 accepted applicants from the EU, an increase of 11% from 2014. It is not clear what will happen to these students or to foreign exchange programmes.
Opportunities
- Sharing of resources and expertise in managing high levels of rented accommodation, construction techniques and legal and tax structuring.
- Joint ventures and investment – risk share for developers and investors. There is now a standard model for most housing development and investment of any scale.
- Branding – creating a name that, potentially, students will stay loyal to in terms of their lifestyle and therefore living arrangements in the same way most build-to-rent providers aspire to. This could possibly open up a new demographic of potential tenants.
- Mix – like the UK’s struggling housing market, there is a need for a balanced provision of student housing. The demand is there and, carefully dealt with, could present a new way to look at an asset class that has previously been regarded almost in isolation.
Julian Keith is a partner in real estate at Trowers & Hamlins
